Did Dodd–Frank Work? Financial Reform, Three Years Later

The Houston-based energy company used accounting loopholes and shady financial reports to hide billions of dollars in debt and cheat its stockholders out of millions. It all ended up as the largest bankruptcy in American history. Some of the company’s executives earned prison sentences. The debacle led to a complete overhaul of the way U.S. corporations are audited.

Then came the 2008 financial crisis, the worst since the Great Depression, bringing with it financial collapse, bank bailouts, plummeting markets and home foreclosures. The stuff nightmares are made of. Risky business on Wall Street was leading to shattered dreams on Main Street.

Intending to prevent more corporate scandals and more financial crisis, Sen. Chris Dodd and Rep. Barney Frank marshaled the legislation that bears their names in 2010.This month marks the third anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which rewrote the rules behind America’s financial system. Its measures continue to be phased in, debated and, in some cases, overturned today. But its effects have been far-reaching and game-changing.

The legislation was designed to safeguard financial stability by improving accountability and transparency. It ended the idea that some banks were “too big to fail” and sought to protect the American taxpayer by ending bailouts and abusive high-stakes financial gambles.

Lending: Credit reporting agencies, credit cards and consumer loans came under the purview of the Consumer Financial Protection Bureau, which is under the Treasury Department.

Wall Street: The Financial Stability Oversight Council assumed oversight of the financial industry and hedge funds. The goal was to prevent another instance where a company like AIG gets “too big to fail.”

Risky bank investments: Former Federal Reserve Chair Paul Volcker said speculative trading (when banks use deposits to trade on their own accounts) led to the financial crisis. The Volcker Rule prohibits banks from profiting by using depositor money to invest in hedge funds. Three years after the passage of Dodd-Frank, many financial institutions complain about the demands of the act and are quietly lobbying for exceptions. The Volcker Rule is one of the provisions banks have railed against the loudest.

Risky derivatives: Credit default swaps must now be transacted via public clearinghouse and regulated by the Securities Exchange Commission or the Commodity Futures Trading Commission.

Hedge funds: Dodd-Frank required hedge fund advisers with at least $100 million in assets to register with the Securities and Exchange Commission so the SEC can evaluate their overall market risk.

Credit Ratings: Agencies like Moody’s and Standard & Poor’s were blamed for over-rating derivatives and mortgage-backed securities, thereby misleading investors. Dodd-Frank created the Office of Credit Ratings (under the SEC) to prevent a recurrence.

Insurance: The act created a Federal Insurance Office to identify insurance industry risks. Responsibility for regulating insurance stayed at the state level, but the FIO created a level of federal oversight covering insurers that purchase derivative contracts or over-the-counter swap transactions.

Federal Reserve: The Government Accountability Office can now audit federal emergency loans. This doesn’t mean bailouts won’t happen in the future, but it means they’ll be subject to a lot more scrutiny.

Three years later, Dodd-Frank is hotly debated, and the legislators whose names it bears aren’t even in office any longer. But the sweeping legislative overhaul, which President Obama described as “a transformation on a scale not seen since the reforms that followed the Great Depression” has had a massive effect on financial markets, creating transparency in trading environments and stabilizing global markets.